Report observes a shift in lending strategies
Recent research from the Bank of England has revealed a significant shift in mortgage trends: one in four mortgages will extend into the borrower’s retirement, and experts from mortgage comparison website Uswitch have further highlighted an increasing number of homeowners opting for longer mortgage terms to manage monthly repayments more effectively.
The mortgage experts, analysing the trends, note that over half of mortgage borrowers now choose terms of 30 years or longer, a rise from 41% in 2021. Additionally, the average term for first-time buyers has increased from 28 years in 2021 to 29 years in 2023, while the average term for remortgages rose from 21 years in 2021 to 23 years in 2023. This shift is partially attributed to the increasing cost of property, with the average home now costing seven times the average salary, far exceeding the four to five-times salary cap many lenders use as a guideline.
Kellie Steed, a mortgage expert at Uswitch, explained that the average property value in the UK is £264,500, while the average salary is £34,900. This disparity forces many to seek longer mortgage terms to afford home purchases.
“It’s unsurprising, therefore, that many are resorting to ‘mammoth mortgage’ terms in order to stretch their affordability to the absolute maximum,” Steed said. “First-time buyers are not the only ones affected. There has been a less significant, but certain increase in average mortgage term lengths across the board since the Bank of England base rate began to rise in December 2021.”
Homebuyers opting for longer terms
Longer mortgage terms reduce monthly repayments, making homeownership more accessible, Uswitch noted. For instance, a first-time buyer borrowing £189,693 at a 5.27% interest rate over 29 years pays £1,065 monthly. Extending the term to 40 years decreases this to £949. While this approach aids affordability, it also increases the total interest paid over the mortgage term, raises the likelihood of carrying debt into retirement, and slows equity growth, increasing the risk of negative equity.
Steed suggests other strategies to enhance affordability, such as joint mortgages, which combine the incomes of multiple applicants, and various homeownership schemes like shared ownership or rent-to-buy. Guarantor mortgages, where family or friends help boost affordability, are also an option.
Uswitch, which is part of RVU, is a UK-based comparison website for home services. Established in September 2000, it helps consumers save on their energy bills and assists users in finding better deals on broadband, mobile, and TV services.
